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INTRODUCTION
The strategic role of the financial system is to channel funds from
surplus units to deficit units. The financial system comprising the set of
institutions, markets and instruments facilitates capital formation and
accelerates the pace of economic development. The gap between gross
capital formation and gross domestic savings in India necessitates the need
for augmenting the growth rate of voluntary domestic savings. So, the
working of different financial intermediaries for mobilising savings from
various income categories will have to be widened and strengthened. It is in
this context that one has to appreciate the role of the Non-Banking Financial
Intermediaries in supplementing the functions of the Banking Institutions.
The Non-Banking Financial Intermediaries' ability to purvey
funds depends to a large extent on the resources they can mobilise.
Miscellaneous Non-Banking Companies or Chit Funds being a category of
Non-Banking Financial Intermediaries, contribute significantly to the value
of financial markets in India.
1.1 NON-BANKING FINANCIAL COMPANIES (NBFCs)
Non-Banking Financial Companies have emerged as an integral
part of the Indian financial system. NBFC is a generic term, which includes
a host of different types of institutions performing various types of financial
services. Sub-section (b) of section 45-1 of the Reserve Bank of India Act.
1934 defines a Non-Banking Financial Company as: (a)
a financial
notify in the official Gazette with the previous approval of the Central
Government. 1 They are generally categorised into the following types on the
basis of their principal business.
mutual benefits. The small savings which otherwise might find little
productive application have been mobilised and turned into tangible wealth
by his catalytic action. Thus the foreman acts as a social functionary. From
an individual foreman, with very limited resources and area of operations,
the proprietor of a Chit has grown into a company managed by a Board of
Directors or to a public sector Chit company, having abundant resources and
wider frontiers of business. These changes have had far reaching influence
in the sphere of Chit Finance in Kerala. This unique financial institution
facilitates savings and capital formation even among the poor in the society.
1.4 ORIGIN OF CHIT FUNDS
This indigenous financial institution had its origin in the State of
Kerala as Grain Chit or 'Dhannya Chit' ,centuries back. 'Chit' means a
written note on a small piece of paper. In Malayalam language, it is known
as 'Kuri'; a synonym of Chit. The 'Chit' or 'Kuri' is a derivative, the root
being the 'lot'.
The Chit Fund business is administered by the respective State
Governments through the offices of the Registrar of Chits. The Chit Fund
Companies are exempted from the requirement of registration under the RBI
Act. However, the deposit acceptance activities of these companies are
regulated under the Miscellaneous Non-Banking Companies (MNBCs)
Directions, and those relating to the advertisement for soliciting deposits are
governed by the Non-Banking Financial Companies and Miscellaneous NonBanking Companies (Advertisement) Rules, 1977 framed by the Government
of India under section 58 A of the Companies Act, 1956.
1.5 CONCEPTS AND DEFINITIONS
"Chitty" means a transaction, whether called Chit or Kuri, by
amount" or
subscriptions payable by all the subscribers for any instalment without any
deduction for discount.
"Discount" means the amount of money or quantity of grain or
other commodity, which a prize winner has, under the terms of the variola' ,
to forego for the payment of 'veethapalisa'; foreman's commission or such
other expenses as may be prescribed.
variola,
is
responsible for the conduct of the Chit and includes all persons taking his
place under section 35 of the Act.
"Subscriber" includes a person who holds a ticket or fraction of a
ticket and also a transferee by assignment in writing or by operation of law.
"Ticket" means the share of a subscriber in a Chit, which entitles
the holder thereof to the Chit amount at anyone instalment with or without
any deduction by way of discount.
"Prize amount" means the Chit amount whether payable in cash,
kind or in any other article of value, less the discount.
1.6 DIFFERENT CATEGORY OF CHIT FUNDS.
Chit Funds are of different categories, which come under the
broad heading, 'Chit Finance'. In Kerala they include the public sector Chit
Company (The Kerala State Financial Enterprises Ltd.), Co-operatives,
Private Chits and those in the informal sector.
1.7 KERALA STATE FINANCIAL ENTERPRISES LTD. (KSFE)
The KSFE, a fully owned Government Company was established in
the year 1969 as a discipline factor to private Chit Funds. The share of KSFE
in the total volume of Chit business registered in Kerala is 77 per cent as on
March 2000, though the number of Chits registered is only 37.5 per cent.
KSFE has been included in the few profit-making public companies in the
State with a profit of RS.793 Lakhs at the end of March 2000. There are over
11 Lakh subscribers in various schemes of KSFE. The number of Chits run by
KSFE amounts to 7,446 with a total capital (sala) of over Rs.952 Crore.
Table 1.1
Number and Sa/a of Registered Chits
as on March 2000 (Rs. Lakbs) Institution-wise
Share of each
Share of each
Capital
Name of the
Number of
to total
to total
sala
Institution
Chits /Kuries
Percentage
Percentage
I. KSFE
7446
37.5
95249
77
2. CO- OPERATIVES
8793
44.2
21101
17
3. PRIVATE CHITS
3633
18.3
7701
Total
19872
100
124051
100
Source:
such as
Monthly Deposit Scheme (MDS) and Mutual Benefit Scheme (MBS) without
getting Chits registered with the Registrar. Though the number of registered
Chits with the co-operatives forms 44.2 per cent, the share of it in the total
volume of Chit business is only 17 percent.
flourished
in Kerala from
time
immemorial. Though the share of private Chits forms 18.3 per cent in the
number of Chits registered, their share in the total volume of Chit business is
only 6 per cent. This is due to the reason that a considerable volume of Chit
business in the private sector are conducted without registration in the State
and therefore outside the purview of official records.
1.10 INFORMAL CHITS
Along with the formal Chit Fund sector, there exists a highly
heterogeneous and dynamic informal sector, with huge volume of business.
This includes Chits conducted by the associations of traders/merchants,
employees in the offices and those informal Chits in urban and rural
localities, churches, temples, educational institutions, small and medium
Chits in the neighbour-hood run by housewives, etc. In every nook and
corner of Kerala, one can find 'Chit collectors'" mobilising substantial
amounts of savings daily for which authentic data is not available. Though
the presence of informal Chit sector is significant, there have been numerous
cases of fraud, misappropriation, disappearance of foremen, etc., which
cause loss to the subscribers and damage the reputation of Chit Funds
Industry in the State.
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very good for the healthy growth of the entire industry. However, despite the
remarkable growth of KSFE, there are many forces in the environment,
which act as a threat to the organisation and to the Chit industry as a whole.
Chit business in Kerala flourished in the hands of private monopoly
till the implementation of the Kerala Chitties Act, 1975. The Act was brought
into force to introduce a unified procedure to regulate the Chit business in
Kerala and to protect the interests of the Chit subscribers. But the
implementation of the Act resulted in an exodus of foremen from Kerala to
other states for starting Chits, especially from bases in Jammu & Kashmir and
Haryana defeating the very purpose of the Act. At the same time, why the
foremen rushed out of the State has not been comprehensively accounted for.
The introduction of the Central Chit Funds Act, 1982
was
expected to take care of this exodus. However many States including Kerala
have not yet adopted the Central Chit Funds Act. Hence there is the need to
examine the limitations of the existing Chit legislation and the whole gamut
of it in the light of the experience gained so far.
Despite the growth of a wide range of savings avenues and the
widespread network of banks and other financial institutions, Chit scheme
still forms an important part in the asset portfolio of many households and
firms in Kerala. The promoters of Chits in the private sector appropriated for
themselves substantial amounts accruing out of their management and there
was also ample scope for exploitation of the subscribers. With a view to
ensure safety, security and better service to the Chit subscribers, the State
Government established, The Kerala State Financial Enterprises Ltd. (KSFE)
in 1969 for conducting Chit business and other financial transactions. The
objective of starting KSFE was to check the mushroom growth of private
Chit Funds by offering effective competition and thereby safeguarding the
interests of the Chit subscribers. The co-operative sector also has developed
into a stronghold of Chits. In addition, there is the conspicuous presence of
the informal Chit Fund sector. Though there are different avenues of savings
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and different categories of Chit Funds mobilising the scattered savings of the
people, what motivates the subscribers in preferring Chits and also particular
types of Chit institutions has not been examined.
One of the most important objectives in setting up KSFE Ltd. as
already mentioned was that it would take up the leadership in Chit Funds
business as a whole and thereby safeguard the interests of subscribers by
offering effective competition. Hence it is also worth examining the
effectiveness of KSFE as the leading institution in this industry. There has
been criticism against the complicated formalities, inadequate customer
service and the high rate of interest charged on its loans. The high default
rate, the under utilisation and mismanagement of funds have been subjected
to lively discussion. Red-tapism and bureaucratic delays in the operation of
KSFE and its role as a competitor to other Chit Fund institutions have been
avenues of savings and borrowings and also to understand how the Chit
subscribers utilise the funds. This study also examines the limitations of the
enquiry into the working of Chit Funds. But it surveyed the Chit Funds of a
very limited area only. The reports of the study groups appointed by RBI and
Government of India from time to time have explained their working in some
detail and made a few recommendations for the healthy growth of NBFCs
including Chit Funds.
Radhakrishnan, S (1975)
II
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and
these studies are rather too old and hence may not reflect the present picture.
Although there are studies on Chit Finance, there is no specific
comprehensive study on the public sector Chit Fund Company (KSFE)
especially, in comparison with its competitors. In this context, an enquiry is apt
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to be made on the socio-economic objectives and the performance of KSFE visa-vis the other Chit Fund companies in the financial sector of Kerala.
1.13 OBJECTIVES OF THE STUDY
The objectives of the study specifically are: I.
To examine the trends and pattern of growth of Chit Funds in the formal
sector in Kerala.
2. To assess the performance of KSFE as the only public sector Chit Fund
Company in India.
3. To identify the determinants behind the preferences for joining Chit Funds.
4. To estimate the cost and return on Chit Funds.
5. To assess and compare the relative preferences of Chit subscribers
towards KSFE with that of other Chit Funds.
6. To identify the major problems of Chit Funds in Kerala in general and
KSFE in particular.
7. To make suitable suggestions for improving the working of KSFE and
Chit institutions in general.
1.14 SOURCES OF DATA AND METHODOLOGY
The study is based on data both from primary and secondary
sources. To study the trend, volume and growth of Chit business in the
formal sector, data have been collected from the Registration Department,
Government of Kerala and from Registrars' Offices at district level. To
assess the performance of KSFE Ltd, data have been collected from the
head-office and from its various branches selected randomly. Data were also
collected from Reports, Journals, Books, Reserve Bank of India Publications
and Government Publications.
To study the trend and volume of Chit business run by cooperative societies, data have been collected from the State administrative
office of co-operative societies at Trivandrum, and Joint-Registrar's offices
at the district level. An attempt was also made to collect data on Chit Fund
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Calicut. The selection of these districts was also guided by the fact that these
are the three districts with the highest volume of Chit business. A fourth
district, viz. Trichur, also was selected due to the strong presence of private and
informal Chit Funds. It also coincides with the location of KSFE headquarters.
The sample subscribers were selected from all the four districts,
from among different categories of Chit Funds, namely, KSFE, cooperatives, private and informal, by taking into consideration their share in
the volume of Chit capital and also to represent rural and urban areas.
Accordingly 160 (40%) subscribers were taken from KSFE, 114 (28.5%)
from co-operatives, 86 (21.5 %) from private, and 40 (10%) from the
informal sector. Selection of sample subscribers was made at random from
the subscribers' list with the foremen, by giving representation to rural and
urban areas.
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1.
amend and consolidate the law relating to Chitties in the State of Kerala,
Ganesh Publications, Kochi, (1995), p.I.
3. Nayar, C.P.S. Chit Finance:
Chit Funds, Vora and Co. Publishers Pvt. Ltd., Bombay, (1973), p.115.
4. The Kerala Chitties Act, 1975, op. cit., p.2.
5. The 'Chit-like' Schemes function exactly like the Chit scheme. They can
The Chit Funds Act, 1982. (Act No. 40 of 1982). An Act to provide for
the regulation of Chit Funds and for matters connected with it, Law
Publishers (India) Pvt. Ltd., (1998).
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(ii) The Report of the study group on Non-Banking Companies under the
Chairmanship of James S Raj (1974) recommended for the enactment of
the central legislation for Chit Funds. The group also recommended that
the administration of the law should be left to the State government
concerned which in turn could seek the advice and assistance of the RBI
on policy matters. They recommended a ban on prize Chits! benefits !
saving schemes, as these were detrimental to general public interest.
(iii) The Report of the working group on financial companies, under the
Chairmanship of A C Shah (1992).
10. Nayar, C.P.S. op.cit.
11. Radhakrishnan, S. et al, Chit Funds and Finance Corporations, IFMR
Publications, Madras, (1975).
12. Traditionally Kerala consisted of three regions namely the princely
States of Travancore, Cochin and the region of Malabar. On November
1, 1956, these regions were merged to form the new State called Kerala.
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